Swiss Re Insurance-Linked Fund Management

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Some ILS funds struggle to even renew core portfolios, let alone grow


As we continue to delve into the market forces set to drive the upcoming January 2019 reinsurance renewals, it’s becoming clear that there are a handful of ILS funds in the market that are set to struggle to renew their existing portfolios, let alone grow or expand, as so much of their capital remains trapped.

January 1st reinsurance renewal calendar imageIn recent days our discussions with ILS fund markets, ILS investors and traditional insurance or reinsurance firms have made it abundantly clear that the renewal is not going to be straightforward for everyone.

The proliferation of catastrophe losses over the last 18 months or so, with the resulting trapping of collateral, ongoing loss uncertainty and loss creep, has resulted in some challenging times for a number of ILS and collateralized markets, which could affect the dynamics we see at the end of this year and beyond.

As a result, there is an expectation January 2019’s upcoming reinsurance renewal season will be challenging, potentially resulting in late signings, while it will be capital availability (or otherwise) as well as losses and loss experience that drive the negotiations.

As we also explained, the collateralized reinsurance sidecar and private quota share segment of the market is already seeing the effects of this, with one sidecar reportedly pulled, another struggling to find the capacity it desires, while investors push-back on attempts to make the terms of collateral release even more onerous.

The result of the impact of the losses of the last two years is expected to be a more challenging negotiating environment, greater potential for rate hardening and a realisation that the ILS market may not expand further until the renewals are passed, as investors and fund managers hold back on fund-raising and deployment, while awaiting greater clarity on loss development and creep.

For some, the trapping of collateral, caused by actual losses waiting to be paid and the collateral from potentially loss affected contracts being held, is causing this renewal to be even more difficult.

As renewals approach, underwriters tend to look to their existing portfolios, to establish what business they would want to renew (should the chance arise), what accounts they might like to upsize, shrink, or pull-back from entirely if underperforming.

But renewing the core portfolio of contracts, to satisfy long-term counterparties and maintain relationships, is normally one of the highest items on the agenda and this year it’s proving challenging for a number of ILS funds and collateralized reinsurance or retrocession providers, we understand.

We’ve heard of at least one case where renewing a full existing portfolio just won’t be possible for a collateralized manager focused on the higher risk layers of reinsurance and retrocession. Others hope to renew as much as they can, but are having to be more selective (no bad thing given the losses).

With some ILS funds having had significant losses from the 2017 hurricanes and other catastrophe events, followed by ongoing loss creep that has dented returns and extended the amount of collateral trapped. Then the Japanese typhoons and other events in that region, followed by hurricanes Florence and Michael. Then with most recently the California wildfires, not to mention all the other minor loss events through the year, the amount of collateral now held is significant in some cases.

It’s making it extremely difficult to even renew the core portfolio, without looking to ways to raise more capital, or other financial solutions, to support and fund that.

With some of the longer-term investors to these ILS funds having re-allocated capital after the 2017 events, added more to take advantage of any market dislocation or post-event opportunities, then upsized investments for renewals through 2018, it’s proving difficult to ask for them to allocate more for 2019, we’re told.

While challenging though, what this might offer some ILS funds is an opportunity to double-down on the relationships they really want to retain and grow, while relinquishing some business that has underperformed over the last few years.

Every portfolio needs a little pruning now and then and after the multitude of catastrophe losses now might be the time.

For those ILS funds lacking in a little capital, due to collateral trapping and reserved assets, this might be the best way forwards for 2019.

It’s a time to asses which counterparties are supportive of rising rates after these losses and perhaps to ditch the ones that aren’t supportive, or are downright adamant they won’t pay more.

Of course, questions on the viability of an ILS strategy may arise for some, if the shrinkage is too much to maintain the fees and income required for their operations.

But that is a natural consequence of the ILS business as well, especially for those playing at the lower and riskier levels in the reinsurance tower.

It’s important to note that funds affected this badly are not numerous, it’s said to be a handful of strategies only.

Most ILS fund managers are successfully dealing with their trapped capital, planning to trade forwards and maintain client relationships, while raising sufficient capital to at least renew their core portfolios, while some others are raising money for further growth, we understand.

But this does reflect an ILS market that is evolving, in terms of size, investor base and where that base allocates to, as well as in the range of ILS strategies that will be available.

With the traditional reinsurance market set to compete hard for some of these riskier layers as well, seeing an opportunity now, it’s going to be interesting to see how and where they renew at 1/1.

Also read:

Property catastrophe rates to rise at 1/1 & beyond: Everest Re management.

One sidecar pulled on lack of investor appetite, others questioned on terms.

Capital availability & losses to drive reinsurance rates at 1/1 renewals.

Retro losses could drive price increases in 2019: Goldman Sachs.

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